04/16/2012 12:24 pm ET Updated Jun 16, 2012

Accounting for Costs in our Energy Choices Might Just Save Our Economies

Ignorance is bliss.

Or is just plain destruction.

And maybe our parents didn't know that they were causing a problem for future generations when they burned everything on sight to keep warm, to fight wars and to run our economies. But we know better. And we cannot pretend we don't know because the science is now crystal clear.

We understand the carbon cycle: The carbon dioxide we put in the air will stay in the atmosphere and on our planet's surface reservoirs and won't go back into the solid earth for millennia. What the earth's history tells us is that there's a clear visible limit on how much carbon dioxide we can put in the air.

Because we now know beyond doubt how much carbon we can pump up into the air, without guaranteeing disastrous consequences for ourselves, our children and certainly for future generations... our upper threshold is 350 parts per million volume. And we have already exceeded that by far and going to increase the rate of carbon dioxide pollution thus warming up our greenhouse dangerously close to catastrophic tipping points.

Yet we also know that we simply cannot go on like this, treating the atmosphere like an open sewer and polluting the earth and still pretending that we do not know what we are doing.

Now that science is sorted, it is corporations and governments that are key to solving this, because they have the best resources at hand, the means and the will to act along with the best possible human resources and intellectual capital. And yet they both choose to stay deaf, blind and mute. They stay obedient to an old flat-earth type of belief system. They act like the proverbial blind man with no sense of smell, caught in a house fire. Sadly he doesn't recognize the danger until it's too late when he finally feels the heat engulfing him, and by then it's far too late... Who amongst us doesn't recognize the need to act on climate change now as if their life depended upon it, when we ask about saving children?

I say this is only because a major flaw in our market economy is that it neither recognizes nor respects sustainable yield limits of natural resources, natural systems and perhaps most importantly it does not account for externalities in our energy and economy systems.

And we keep up this illusion because of some sort of illusionary magic. Here is the trick revealed: Since we not only distort reality when we omit costs associated with burning fossil fuels from their prices, but governments actually subsidize their use -- distorting reality even further -- we are complacent in our faulty accounting. Worldwide, subsidies that encourage the production and use of fossil fuels add up to roughly $500 billion per year, compared with less than $70 billion for renewable energy, including wind, solar, and biofuels. Governments are shelling out nearly $1.4 billion per day to put carbon emissions into the atmosphere, causing the greenhouse gas effects that warms up the planet and destabilize the earth's climate, destroying people's lives. Because of all this we had 65 million climate refugees this year alone and who knows what next...

This being the season of Passover, we must remember and respect that unlike the old times, this is not an Exodus of proud people away from bondage towards a promised land of milk and honey, but a desperate bunch of ragtag refugees fleeing environmental apocalypse, and crossing boundaries to save their very lives... A lot more of the peoples around the world are on the move today, and for many a deteriorating environment back home will have played a part in their decision to up sticks and go forth to the unknown. These are the environmental migrants, sometimes grouped under the label "climate refugees" and they push the billiard balls in our realpolitik with push-on stresses to other societies around the world who cannot accept the influx of refugees. And this population shift is scheduled to increase tremendously because of the incoming climate chaos. Last century was known for the migratory shift of people from the country to the cities. And this century will be known for the mass migrations across borders of climate refugees. Still now 80 percent of climate forced migrants move within their own country and only 20 percent across borders, but with states failing, this trend will be to have the vast majority of climate refugees moving across national and international boundaries causing systemic changes, national identity dilution and shifts in populations dynamics overnight.

Yet we keep on doing the same thing and burn things up that contribute to these problems. We do this subsidy business of the fossil fuels, although, we know that by shifting subsidies to the development of clean sustainable energy sources such as wind, solar, and geothermal power we will help stabilize the earth's climate.

We are economic decision makers, whether as corporate planners, government policymakers, investment bankers, or consumers. And we rely on the market for price signals to guide our behavior. But if the market gives us bad information, we make bad decisions, and that is exactly what has been happening.

Take the African drought of the 1980s where many millions of people died. The image of people fleeing the advancing desert is now repeated everywhere across the equatorial zones and especially in the Sahel, in the eastern horn, and all over Africa's equatorial regions.

We allow all this to happen, because we are currently being blindsided by a faulty accounting system, one that will lead to bankruptcy. As Øystein Dahle, former vice president of Exxon for Norway and the North Sea, has observed: "Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow the market to tell the ecological truth."

For energy specifically, full-cost pricing means putting a tax on carbon to reflect the full cost of burning fossil fuels and offsetting it with a reduction in the tax on income. Some 2,500 economists, including nine Nobel Prize winners in economics, have endorsed the concept of tax shifts. Harvard economics professor and former chairman of George W. Bush's Council of Economic Advisers N. Gregory Mankiw wrote in Fortune magazine: "Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming -- all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer."

The failure of the market to reflect total costs can readily be seen with gasoline. The most detailed analysis available of gasoline's indirect costs is by the International Center for Technology Assessment. When added together, the many indirect costs to society -- including climate change, oil industry tax breaks, military protection of the oil supply, oil industry subsidies, oil spills, and treatment of auto exhaust-related respiratory illnesses -- total roughly $12 per gallon. That is on top of the price paid at the pump. These are real costs. Someone bears them. We bear them daily and not just us, but our children as well since we choose to kick the can down the road some more each and every day.

If we can get the market to tell the truth, to have market prices that reflect the full cost of burning gasoline or coal, of deforestation, of overpumping aquifers, and of overfishing, then we can begin to create a rational economy. If we can create an honest market, then market forces will rapidly restructure the world energy economy. Phasing in full-cost pricing will quickly reduce oil and coal use. Suddenly wind, solar, and geothermal will become much cheaper than climate-disrupting fossil fuels.

See what happened with the Great Recession and the black boxes of Wall Street financial engineering where all real accounting was thrown out of the window... How is that working for our societies?

If we leave costs off the books, we risk bankruptcy. Simple as that.

A good example is what happened a decade ago, when a phenomenally successful company named Enron, was frequently on the covers of business magazines as the fastest growing company ever. It was, at one point, the seventh most valuable corporation in the United States. But when some investors began raising questions, Enron's books were audited by outside accountants and their audit showed that Enron was bankrupt. Completely worthless and it was all some illusionary magic of tricky accounting similar to what we are performing in our fossil fuel energy use today. It's good to remember that Enron's stock that had been trading for over $90 a share and then it was suddenly completely worthless. All because Enron had devised some ingenious techniques for leaving costs off the books.

We are doing exactly the same thing, but on a global scale.

If we continue with this practice, we too will face bankruptcy.

And on the short term, we shall have to adapt to many unpleasant changes too.

Now that policy-makers accept the world will have to adapt to inevitable effects of climate change, we need to see migration as part of that process, he said.

This is a tricky proposition for westerners who fear hordes of migrants, but climate change is a growing threat and environmental refugees will be a fact of life. Mass migration, is one of the many ways in which individuals, and the world, must adapt.



PS: And most importantly we haven't told nor have accepted the truth about our own hand's involvement in the invisible hand of the markets.

And of how we are also responsible for the matter at hand to begin with.

Something to do with NLP and the way we refer to ourselves is missing here, and that is why we aren't living up to excellence... and risk economic collapse and worse.

This post originally appeared on Bleeding Edge Blog.